L&T Infotech (LTI) share price: Motilal Oswal values it at 10% discount to TCS valuation

L&T Infotech (LTI) share price: Motilal Oswal attended LTI’s Analyst Day, where the management announced a large deal win and new business units (BUs) in Digital and Data Products. Industry-leading growth, RoCE, and prudent capital allocation should defend the rich multiples of the company. Motilal Oswal valued L&T Infotech stock at 25x Sep '22E EPS (10% discount to TCS valuation). They maintain Buy rating on L&T Infotech (LTI) with target price of Rs 3550.

Here are the key highlights from the L&T Infotech meet:

Dedicated Business Units (Bus) for Cloud and Products to help position it v/s larger peers:

Motilal Oswal sees L&T Infotech announcement of independent business units for its Cloud and Data Products as a very interesting development. Given a similar strategy being adopted by large-cap peers like TCS and Infosys, Motilal Oswal views this as a positional play by the company in addition to the growth opportunity. Creating separate teams to focus on the top three hyperscalers, along with Cloud reference models for the sub-industry should help L&T Infotech benefit from a multi-year Cloud migration opportunity. While Motilal Oswal sees new BUs as positive from an overall positioning, they are still unsure of the business potential from a standalone basis given the limited success across the industry from products in the past.

Sustained investment needed for meaningful revenue from new units:

As part of the increased Cloud and Products focus, L&T Infotech is planning to increase investment in its sales and marketing team. Increased investment is necessary for it to establish its presence in front of customers and should benefit in the long term. However, Motilal Oswal are skeptical of its ability to generate outsized revenue growth from these businesses in the medium term due to elevated competition and expect these investments to continue over the next few years.

Large Middle East deal win and strong pipeline to add to FY22 growth:

L&T Infotech announced a large Cloud deal win of (USD 207 mn) in partnership with Injazat (part of Mussafah group) over the next six years. This deal should strengthen LTI’s Cloud credentials and capability in the Middle East. Motilal Oswal sees this as 2% accretive to its FY22E revenue growth and have raised FY22E/FY23E revenue/EPS numbers accordingly. It also highlighted L&T Infotech robust deal pipeline of USD1.9b (up 62% YoY), although it continues to see delays in the conversion to revenue. It expects its deal conversion timeline to improve by the second half of FY22. LTI also reiterated its FY22 PAT guidance of 14-15% of revenues, but expects this to be volatile during the year on the back of increased investments.

See Zee Business Live TV Streaming Below:

Valuation and view:

L&T Infotech has deep domain capabilities. Low exposure to segments that faced headwinds (legacy IMS, BPO) should be favourable in the current context. The reinstatement of PAT margin guidance, the ability to sustain operational efficiencies (offshore) and strong deal pipeline indicate an optimistic outlook.